Rail vs. Barge: Which Can Get Bakken Crude to Refiners Faster and Cheaper?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude-oil producers in the Bakken formation can capture premium pricing for their product if they transport it to Midwestern or Gulf Coast refiners by ship on the Mississippi River, a logistics executive told an energy industry conference here late last month.

"Producers are using a variety of transportation options--truck, rail, barge and pipes--to get maximal value for their Bakken crude oil," Larry Daily, president of Alter Logistics (Bettendorf, Iowa), told about 300 attendees at the Bakken Infrastructure Finance & Development Summit. He acknowledged pipelines are traditionally the least-expensive way to transport crude to refineries. "But the pipelines out of the Bakken are all full right now, and there's a lot more production coming online. Besides, pipelines are hard to permit, and we've seen cases like Keystone XL where things that make all the sense in the world don't get approved."

"It also takes a long time to get crude from the Bakken to the Gulf Coast by rail, and the rail system is pretty congested," Daily told the October 25 conference, sponsored by Information Forecast Incorporated (Infocast) (Woodland Hills, California). "There's a long waiting line if you want to ship your crude on the current rail network." He estimated it would take less than 10 days to transport crude oil from the Bakken to the Gulf Coast using a combination of short-haul railroads and barges on the Mississippi River. By contrast, it would take at least twice that long to move that crude by long-haul rail.

Of course, Daily's firm has a dog in this hunt: Alter Logistics is a water-borne logistics company that would like nothing more than to take the crude-oil shipping market share away from pipelines and railroads. "For us, business is good right now," he told Industrial Info in an interview.

Rapidly rising crude-oil production in the Bakken has created bottlenecks but also business opportunities for logistics companies that can move it from North Dakota to refineries either in the Midwest, Gulf Coast or East Cast. For more on current and projected crude-oil production levels in the Bakken, see November 2, 2012, article -Crude Oil Production in Bakken Formation Shows No Sign of Slowing.

"It all comes down to premiums and discounts," Daily told Industrial Info. "The reason Brent crude is priced at a premium is because you can put it on a ship and get it to the Gulf Coast." By contrast, West Texas Intermediate (WTI) crude oil from the Mid-Continent sells at a discount because too much of it ends up caught in bottlenecks around Cushing, Oklahoma, he added.

Daily encouraged producers in the Bakken to consider shipping their product to Midwestern refiners using a combination of short-haul railroads and barges on the Mississippi River. "The configuration of refineries in the Midwest means they can blend Bakken crude with other slates to lower their processing costs and more readily meet environmental regulations," he said.

Transporting Bakken crude by a combination of truck, rail, and barge to either Midwestern refineries or Gulf Coast refineries is cheaper and faster than sole reliance on railroads to reach either market, the Alter Logistics president added. "The winners will get in early and take the time to do it right. But the losers get in late and try to do it too fast," Daily told Infocast conference.

Not surprisingly, railroad representatives took issue with Daily's dour predictions about the economics of crude by rail. Speaking specifically about railroads in the Bakken, Paul Hentschke, client and project manager at TranSystems Corporation (Kansas City, Missouri), said, "Shippers have made significant capital investments to expand their infrastructure and accelerate train speed."

Rail shipments of crude out of the Bakken have doubled since 2010, according to Kevin Cook, global director of the rail transportation group at Midland Manufacturing Corporation (Skokie, Illinois). "Rail is a reliable alternative to pipelines."

A speaker from BNSF Railway Company (Fort Worth, Texas), a subsidiary of Berkshire Hathaway Incorporated (NYSE:BRK-A) (Omaha, Nebraska), said the company's recent expansion of its rail system enables it to transport up to one million barrels of crude oil per day out of the Williston Basin, where the Bakken is located. This year, BNSF will invest $197 million to expand transport and handling capacity in North Dakota and Montana.

"In the Bakken, crude oil production came online faster than anyone predicted," Denis Smith, vice president of BNSF's industrial products marketing group, told the conference. "Demand for Bakken crude is so strong because it is lighter and sweeter than the benchmark WTI crude oil, he added. "Each month, tens of thousands of crude-oil railcars originate or terminate in the Bakken. It looks like this pace of growth is here to stay."

An executive from Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia) told conference attendees that railroads transport more crude out of the Bakken than pipelines. "Crude by rail has a pretty bright future in the Bakken," said Alan Shaw, group vice president for chemicals and industrial products at Norfolk Southern.

Several speakers noted today's expanded menu of transportation options allows producers in the Bakken to arbitrage between different markets for their products. "Producers are now free to chase spreads across the U.S.," noted Trevin Hogg, business manager for LPG/Petroleum Marketing for Union Pacific Corporation (NYSE:UNP) (Omaha, Nebraska). "Today, you can ship to Philadelphia one week, the Gulf Coast the next week, and Bakersfield the week after that."

Crude-oil railcar manufacturing has significantly increased in recent years, but the cost to lease or purchase railcars has also increased. Railcars sell for about $120,000 today, which is roughly triple what they cost in 2008, said Midland Manufacturing's Cook. He estimated that 17,000 to 18,000 crude-oil tank cars will be built this year, and between 23,000 and 28,000 next year. While rising steel prices are a factor pushing up the cost of railcars, Cook said the biggest constraint today is the availability of skilled craft labor: "Demand for welders has far outstripped supply."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.